Should Investors Be Worried About the Election and What to Do If You Are
By Derek Moore
What Does History Tell Us?
It doesn’t matter in the long run.
Honestly, look at the chart above. A few years ago, I pieced together historical data back to 1923 of the average annual return across periods from times when one party controlled all three (President, Senate, House), and various mixes and matches of constructs. Some of these happen more often than others.
Others not so much and so a small sample size where timing was unfortunate (9/11, tech crash, or other market events).
While you might see other analysis run from election date to election date, or inauguration date to inauguration date, I simply just used full years and where most of the year was made up as such.
The goal was just to look and see and in general despite the period consisting of only 2 years, all of them historically were positive. I did find it interesting that the DRD (Dem President, Rep Senate, Dem House) had not occurred over the analysis time horizon.
If an investor decided to sell and go to cash because their preferred outcome didn’t pan out, most likely they missed out on positive returns.
Can we see short term declines or volatility around the election? Of course, just as we can around other events like earnings, Fed announcements, economic news, or things that just pop up that no one was following like the Yen Carry Trade in August. We can’t predict the future.
But hey, I went back and looked at the historical numbers and it was what it was.
What Is VIX Telling Us?
Source: Bloomberg (Showing current VIX spot price with VIX futures contracts to 6/25)
This graph above, taken the morning of 10/30, shows the VIX futures in backwardation, albeit with a December kink lower.
Backwardation is a fancy term to say the front months are higher than the back months. The VIX spot is what you see displayed on CNBC and is not tradeable. It’s just a measure of the 30-day volatility expectation based on the S&P 500 Index option chain. VIX Futures are tradeable products and often what happens is towards expiration, the spot and future tend to go towards one another.
That can be spot coming down to the futures price, or the futures price rising to spot.
Or any other combination of both.
What this shows is the combination of being in the throws of earnings season and the election, the near-term expectation of volatility is higher than say December, a month historically with lower volatility. Could this be just a reflection of the herd mentality of everyone expecting volatility around the election? Sure, as the market is pricing in those expectations and pricing in the options market via ‘premiums’ are embedding those expectations.
So, What Can You Do About It?
Source: ZEGA Investments Buy & Hedge Presentation
Sometimes doing less is more for investors who have a long-time horizon.
Since we know time in the markets is more important than timing markets, why not just be hedged? Above is a hypothetical profit and loss graph taken from our Buy and Hedge Strategy Presentation where you can read about the benefits and risks in more detail https://zegainvestments.com/products/buy-and-hedge .
The intent with a hedged equity strategy is to capture a good portion of the upside while putting in downside protection that aims to offer protection.
For advisors or individual investors looking to stay in markets with some downside protection, hedged equity would seem like a good potential solution.